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That's if you assume the poor are hurt through the value of their salaries and savings, not through the value of their debts.

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Migeru (migeru at eurotrib dot com) on Tue Nov 21st, 2006 at 09:43:16 AM EST
[ Parent ]

We had a discussion on that with Migeru a few weeks ago. http://www.eurotrib.com/comments/2006/11/5/224337/782/9#9

We googled'up correlations. It appears inflation is very bad when it turns to hyper-inflation, but mild inflation has little redistributive impact. It can be good for the middle class with easy access to credit, by melting the debt (it helped most boomers of the now-industrialized nations after WWII), but does nothing for the very poor.

Upon thinking about it a little more, I came to the idea that it's may be inequality to access to the money supply, the other armed hand of the central bank. Many say the present bubble stems in part from the fed "printing money", increasing M3, etc.. So once there's so much money, all asset classes spike up - which is actually inflation, except it doesn't impact the retail sector. But honestly, retail isn't the main budget item of the middle class, it's by far the rent/mortgage for the housing, followed by the more or less compulsory savings for retirement (except with those crazy americans) - and if the assed where you put you're savings are spiking, you effectively suffer from strong inflation.

So the "real" inflation in the past years, taking into account those bubbling assets, has indeed been very hard to the people, much more than core price index would say. Net wages have eroded even worse than you argued in many passed comments. But this is a side note, back to my money supply idea...

This supplied money is injected mostly on the state and corporate bonds markets, where banks loan all this cash they don't know what to do about. They have so much they make risky loans with very low rate premiums, to corporations/hedge funds primarily. Never to Mr. Average D. Joe. The supplied money does not trickle down, it stays in the asset bubbles. And benefits the investment bankers who take fees, the CEO with the options and golden parachutes, and corporations which can fund capital-intensive projects to eliminate workers at cheap rates, then buy back their shares (so the funds and fund managers benefit also).

Pierre

by Pierre on Tue Nov 21st, 2006 at 10:08:40 AM EST
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Re: Inflation (4.00 / 3)

It boggles my mind that we can have 10% housing price growth per year, sustained over 10 to 15 years, and with the rule of thumb that people spend about 1/3 of their income on housing, and that anyone can claim that inflation is below 3 percent.

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Migeru (migeru at eurotrib dot com) on Tue Nov 21st, 2006 at 10:14:13 AM EST
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Yep. Even worst than that in France in the past 7 years: +15%/yr. But it's over just like in the US, although noone with a foot in the business will readily admit yet:

When averaged over a longer period covering the 1992 crash, housing inflation in France is more moderate. But not everyone has the resource to hold on during the bubble years in a market with 15-year cycles.

I think the long term driver (averaging over a generation) cannot be anything else than demographics, hence the housing collapse in Germany. Spain, with its record low fertility rates, looks like the perfect hyper-bubble to me. Will burst when the retired Britons buying on the coast will no longer be able to "commute" their on low cost airlines...

Pierre

by Pierre on Tue Nov 21st, 2006 at 10:20:34 AM EST
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How were Spanish fertility rates 20-30 years ago?

by Colman (colman at eurotrib.com) on Tue Nov 21st, 2006 at 10:22:23 AM EST
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Knock yourself out.

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Migeru (migeru at eurotrib dot com) on Tue Nov 21st, 2006 at 10:26:20 AM EST
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I love national stats agencies.

by Colman (colman at eurotrib.com) on Tue Nov 21st, 2006 at 10:32:39 AM EST
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I'm actually quite pleased with the quality of the INE online database.

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Migeru (migeru at eurotrib dot com) on Tue Nov 21st, 2006 at 10:39:45 AM EST
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I was being perfectly sincere.

by Colman (colman at eurotrib.com) on Tue Nov 21st, 2006 at 10:53:48 AM EST
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Touched bottom in 1996/8 at 35.46 children per 1000 women aged 15-49, down from 79.19 in 1975 (when I was born) and back up to 41.88 in 2005 (same level as in 1989/90).

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Migeru (migeru at eurotrib dot com) on Tue Nov 21st, 2006 at 10:44:51 AM EST
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I knew I wasn´t senile! H.B.!

Our knowledge has surpassed our wisdom. -Charu Saxena.

by metavision on Tue Nov 21st, 2006 at 12:51:33 PM EST
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Mi no comprende, ni este ni el otro.

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Migeru (migeru at eurotrib dot com) on Tue Nov 21st, 2006 at 01:11:09 PM EST
[ Parent ]

Dijiste que estabas a punto de cumplir 31, en algún comentario: F.cumple, no?.

Our knowledge has surpassed our wisdom. -Charu Saxena.

by metavision on Tue Nov 21st, 2006 at 04:43:38 PM EST
[ Parent ]

I am 31 and I'm on the tail end of Spain's "Baby boom". That might be a factor.

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Migeru (migeru at eurotrib dot com) on Tue Nov 21st, 2006 at 10:24:37 AM EST
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It is here, together with the immigration. It's not just a bubble in Spain or Ireland. It's an irrational bubble on top of a demographically driven demand. My guess in Ireland is that the market is about 20% over or so - the OECD say 14%. The average is heavily distorted by mad prices for some "desirable" properties though. I'd say the bottom of the market is maybe 10% over and the middle to top anything up to 50% over.

by Colman (colman at eurotrib.com) on Tue Nov 21st, 2006 at 10:29:12 AM EST
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<my lips are sealed> for two remarks.

Our knowledge has surpassed our wisdom. -Charu Saxena.

by metavision on Tue Nov 21st, 2006 at 12:54:56 PM EST
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Of course asset inflation is inflation, and it IS hurting the poor most (and it will even more when it crashes).

That's part of the whole class war, and Trichet, who again dared say last week that he followed asset prices, was roundly condemned for outdated thinking.

Hang on to your euros.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Nov 21st, 2006 at 10:24:26 AM EST
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The problem is that salaries are pegged to inflation measures that exclude asset inflation by definition.

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Migeru (migeru at eurotrib dot com) on Tue Nov 21st, 2006 at 10:34:19 AM EST
[ Parent ]

Remember that buying a house is counted as an investment and so not counted in inflation.

When you rent it is counted in inflation, but rent raises are controlled in most countries (like France) so this doesn't show up in inflation. And most people do not rent anyway so the weight in the inflation basket is not high.

by Laurent GUERBY on Tue Nov 21st, 2006 at 05:01:40 PM EST
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Re: Inflation (4.00 / 3)

Heh.

I think that when we assume that inflation hurts the poor, we assume that things like mimimum wages, marginal tax rates, welfare and pension allowances, family and housing allocations cannot be indexed, when the fact of the matter is they can be (and indeed, in France though not in America, largely they are).

I simply take Milton Friedman's word and suppose that monetary theory's implication is that inflation is simply a tax on holders of the currency being inflated (again, largely by monetary policy). Holders of currencies tend to be in direct proportion to wealth denominated in said currencies. Thus inflation can be quite progressive, assuming of course that pensions, after-tax wages and other allowances are properly indexed.

Of course, the economist in me recognizes that there is economic inefficiency in inflation, ie, there can be too much inflation, as seen in a good numer of studies correlating high inflation to lower economic growth. Which makes sense given the amount of energy folks waste trying to avoid its effects in environments where inflation is quite high.

But 2% is not that benchmark. 4% probably is too low as well.

I would be ashamed to admit that I had risen from the ranks. When I rise it will be with the ranks, and not from them Eugene Debs

by redstar on Tue Nov 21st, 2006 at 12:19:41 PM EST
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Yes, but there is a limit to Milton's "tax on currency holders". They don't hold so much currency as assets denominated in that currency. And if the price of assets spikes in direct proportion to the M3 or another indicator of the amount of cash in circulation, they are effectively protected against devaluation of the currency and inflation. This is what has been happening so far.

But since the "official" inflation figures are openly biased so that they don't include those assets (although they are the heaviest part of mandatory daily spendings), the tax burden has effectively been transfered onto the poor.

Statistics institution don't even need to tweak retail prices to shave 0.5% off the inflation benchmark, this is near conspiracy-theory, when they are already very openly shaving 10% off by not including :

housing (which could be included very objectively)
and even shares (which form the underlyings of many pension schemes and therefore are mandatory purchases for many people - but here it is harder to differentiate between the "normal" signal of growth expected from savings, and the "bubbling" of inflation)

Pierre

by Pierre on Tue Nov 21st, 2006 at 04:04:43 PM EST
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I would think that whether the asset be extremely liquid (as in cash) down to illiquid (real estate), its denomination determines susceptiblility to inflation via monetary policy.

Over the long run, inflation cannot be avoided by holders of assets it seems to me, though in the short term, there are clearly cases where this is not, temporarily at least, the case, though the bubbles we tend to see are most often seen in environments with low inflation. I note bubbles in the EU, and this is despite a more or less "successful" targetting of inflation by the ECB of 2%. Similarly, inflation in Japan was minimal when they had their bubble, and in the US, while not as Germano-anal about monetary policy as the ECB, consumer inflation has also been largely under control. Either way, someone somewhere eventually has to deal with converting a return denominated in "local currency" to a return adjusted for "currency conversion." Or, if the asset is denominated in one's home currency, this soneone has to deal with a real depreciation of the value of that asset and the cash flows it generates relative to his or her liabilities, which are likely to be denominated, at least to some extent, in other currencies. (A formerly middle- to upper-class Argentine will recognize what happens in this dynamic when something drastically goes wrong, though at lower rates of stimulatory inflation, the "tax" is not going to be as distorting, as France and Italy in the 1970's arguably encountered.)

I also think, like you, that we do need to be careful when we are talking about consumer inflation, and it is indeed true that government agencies and central banks can play with them or not aggregate them the way we might think most relevant. For one thing, CPI is usually considered a unitary figure, at least as far as the US goes, when in fact, regional variations as well as different CPI trends by income strata are often observed. I assume this is the case in the EU as well. This being said, at least as far as US inflation statistics are concerned, asset inflation does impact the calculation of CPI via owner's equivalent rent.

Now, it is true that OER doesn't track asset inflation perfectly, and that it does tends to understate inflation when there's a hot real estate market. But over the long term, this too corrects itself when the market inevitably cools off and the OER portion of the index snaps back. (Year on year OER is in the 3-4% range in the US now, and rising, after being around 2% from 2002 onward.)

Outside of housing, I'm not sure what other portions of CPI are directly impacted by asset inflation, so as far as lower income deciles are concerns, I'm not sure we need to worry much about it for the purposes of indexing to protect them from the effects of inflation. And lower deciles don't typically hold assets to speak of, so discussions of asset inflation beyond OER is largely irrelevant.

As for those who actually hold the assets, eventually they do pay the price of that inflation. It is simply a matter of time. And while stimulus may feed bubbles which work their way out, eventually, via a period of asset deflation it seems to be that some of the bubbling effects of such stimulus can easily be addressed via fiscal means (for example, greatly increased taxation on capital gains, greatly increased local property taxes on unimproved land, or on non-primary residence property).

I would be ashamed to admit that I had risen from the ranks. When I rise it will be with the ranks, and not from them Eugene Debs

by redstar on Tue Nov 21st, 2006 at 05:27:08 PM EST
[ Parent ]

In France, there are separate index for recalculating housing rents (which are bound by law, and based on a sectorial inflation index, refering to the cost of construction, which is not as widely swinging as the cost of real estate). It is not included in the "consumer inflation" index.

It's true consumer inflation does matter the most for the underclass, but note that the middle class most often has both assets and debt, denominated in the same (local) currency. Historically, assets like housing have well survived inflation in France, so when debt melts, inflation helps the middle class. Except when they have to resell housing on the bad side of the wave and the debt is 30+ years (the coming picture in France).

Another thing is state debt: euro nations have had a tradition of letting inflation melt away their public debt, and although this should have stopped with EMU, bad habits die hard and this will hurt (they're still emitting much debt that won't melt away this time...)

But there are smart asses in some of France debt management agencies, like CADES which now has 8% of its debt in foreign currencies, and is betting hard against the US$. I guess the main AFT agency will soon follow. This time the trick is that they borrow dollars, sell them off for euros, spend them domestically, and when time to refinance will come the dollar will have tanked and they will borrow in euros again..

This will buy eurozone nations some years of relapse before they follow the same path as the US (state bankruptcy I think...)

Pierre

by Pierre on Wed Nov 22nd, 2006 at 04:28:27 AM EST
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Agreed on the middle class, this is a generalized thing in industrialized economies, I think, though home ownership is not as prevalent in France as it is in other parts of the OECD like the US. (I know I could never have afforded to buy a house in France when I was still living there, but mortgages were 15 years and I was early on in my career. Home ownership is easier when 30 year terms are offered, which is likely the point, and likely why a semi-autonomous government agency so actively underwrites such loans in the US.)

Of course, also generally speaking, the middle class tends to have adequate representation in OECD countries. The poor, not so much, and especially not in the US.

Assuming inflation is simply a tax on one's assets, I'm not so sure this is any better or worse, in theory, than explicit taxation. It is a maco-economic level which was available to policy makers in advance of convergence, but now, not so much.

Please elaborate on the latter point. Are you saying the ECB tight-money policy is designed to ensure this macro-economic lever is no longer available whatsoever to policy makers (beyond those at the ECB)?

I would suggest it is exactly such undemocratic, autocratic and unresponsive federal tendencies which undermine public confidence in the European project in general and EU institutions in particular, as evidenced by the firm rejection of the constitution by voters given a chance to voice an opinion on it.

Sounds like an excellent plan on paper. The carry-trade in the service of man, excellent plan. I think the secular USD decline might be too gradual to be of practical use to them, though. I'd think a conservative fund manager (which they would necessarily be given their position) would avoid such strategies, though I suppose it would depend on how it is structured.

This will buy eurozone nations some years of relapse before they follow the same path as the US (state bankruptcy I think...)

I don't share your pessimism here, the parlous state of the US both in terms of federal and state budgets deficits (remember the latter, it is usually ignored, but a lot of that bonding is for general fund uses, much as seen in many Argentine states a decade ago) as well as the trade deficit are cause for worry. The EU on the other hand has consistently seen a BOP figure in surplus, because unlike the US, the EU actually still produces things, thanks in large part to an active industrial policy, and despite the hand-wringing of its elite class (no more gloriously on display than on France's right), it is still quite an attractive place for investment.

OTOH, seems to me a little inflation and a bit of growth such inflation would likely kick off would relieve budget pressures in the EU core. Further, we are likely to witness the secular decline of the USD as reserve currency in our lifetime, which bodes well (though certainly not exclusively) for the general cost of capital in the Eurozone, to the USD-zones' detriment.

I would be ashamed to admit that I had risen from the ranks. When I rise it will be with the ranks, and not from them Eugene Debs

by redstar on Wed Nov 22nd, 2006 at 01:34:22 PM EST
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